History proves that when the economy is bad, more lawsuits are filed. In fintech, with downward trending markets and various geopolitical events driving increased uncertainty, the impetus to litigate is even greater.
It’s no secret that groundbreaking innovation in fintech—like blockchain, decentralized finance (DeFi), and cryptocurrency (crypto)—has stoked competition among major players and new entrants. That competition puts companies in a high-stakes race for market dominance as they compete for a growing amount of R&D funding.
According to dealroom.co, fintech startups raised $32.4 billion globally in Q1 2022, up 27% year over year. Crypto and DeFi funding, in particular, is growing faster than any other segment, with crypto startups now taking the mantle as the most invested sector in the space.
With VCs flocking to invest in fintech and the unbridled potential for profitability, what makes fintech firms a bigger target for rampant securities class action lawsuits?
The short answer is—little to no regulatory oversight in the way companies operate. Over the past few years, the fintech space has undergone a transformation led by disruptive technology innovation. Blockchain, DeFi, crypto, and the like have created an undefined category in finance—and one that investors hope to be tremendously rewarded by for being at the forefront. Because of the limited guardrails around this modern practice, the fintech space attracts intense scrutiny, particularly when an investor’s money is at stake. And with an opportunity to wrangle in well-funded, uncharted territory for damages potentially worth millions to billions of dollars, plaintiffs and prosecutors are gearing up for litigation against companies whose practices are suspect.
Meanwhile, from a corporation’s point of view, these fintech companies are simply trying to ‘play bigger’ and claim a stake in a face-paced, moving market.
In business, being an ‘also-ran’ can be a death sentence. According to The Motley Fool, more than 12K cryptocurrencies exist today, growing at a rate of roughly 1000 new cryptocurrencies a month. That astounding number and the fact that there are no real barriers to entry into the space make competition for investors that much fiercer.
Aside from the rapid growth of crypto exchanges, other activity in the financial industry provoking competition comes in the form of partnerships and transactions between traditional institutions and fintech firms. For example, SWIFT, the most widely used platform for traditional cross-border fiat transactions that connects more than 11,000 banks in 200 countries and territories globally, recently announced a plan to work with Chainlink, a provider of price feeds and other data to blockchain. In an initial proof-of-concept, SWIFT will use Chainlink’s cross-chain interoperability protocol (CCIP) to enable its network to communicate across all blockchain environments. If successful, this will have a tremendous impact on a standard for communicating transactions that include cryptocurrencies and will create another foothold for digital assets in the industry going forward.
Nevertheless, despite the allure of a crypto promised land, a looming recession will drive investors suffering economic injury to seek retribution for financial loss.
Securities class action claims against fintech companies aim to prove financial liability under allegations that companies knowingly misled investors. And with fuzzy regulatory oversight in the crypto wild west, claims made will likely involve fraudulent statements on corporate public filings, misappropriation of corporate funds, business metric manipulation, breach of fiduciary duty, and regulatory violations.
To prepare for litigation, counsel should consult with industry experts, particularly former c-suite executives, to support class certification motions and hearings by providing insider perspectives on the market, the company, and the class. These industry insiders can also support counsel in motion practice, settlement, and trial. Additionally, technical experts can speak to specific technological issues at the heart of the claims, and academic experts can speak to the industry and whether the issues in question are specific to the defendant or beyond the defendant’s control.
No matter the issue, WIT has teams of fintech experts prepared to address incoming disputes in the space. Our expert teams were created to address what we expect to be the key areas of litigation in emerging technologies, including patent litigation, theft of trade secrets, technology-based M&A, regulatory/criminal actions, shareholder/securities class actions, and consumer class actions.